First of all, it's useful to know what is a safe haven asset. A safe-haven asset is a financial instrument that is expected to retain, or even gain value during periods of economic downturn. These assets are uncorrelated or negatively correlated with the economy as a whole, which means that they could appreciate in the event of a market crash. There are certain characteristics that assets often have that contribute to their reputation as a safe-haven, which include:
A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility. Most times, when the market rises or falls, it is for a short period of time. However, there are times, such as during an economic recession or a pandemic (like Covid-19), when the downturn of the market is prolonged.
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a "volatile" market. An asset's volatility is a key factor when pricing options contracts.
Bitcoin, made publicly available in 2009, began its rise to popularity around 2010 when the price for one token rose from fractions of a dollar to $0.09. Since then, its price has increased by tens of thousands of dollars—sometimes rising or falling thousands of dollars within days. So it can be considered really volatile. There are several reasons why Bitcoin has such a volatile price history.
Supply and demand influence the prices of most commodities more than any other factor. Bitcoin's market value is primarily affected by how many coins are in circulation and how much people are willing to pay. As the most popular cryptocurrency, Bitcoin demand increases because supply is becoming more limited. Long-term, wealthier investors hold their Bitcoins, preventing those with fewer assets from gaining exposure.
Bitcoin volatility is also driven, to an extent, by these investors. It is unclear how Bitcoin whales—investors with BTC holdings in the tens of millions or more—would liquidate their significant positions into fiat currency without affecting Bitcoin's market price.
The following image shows the volatility computed for each year, from 2015 to 2020:
However Bitcoin is the first and most known cryptocurrency, it is really volatile. It is also the most traded crypto. Indeed the following image shows the volume of trade of Bitcoin and other cryptocurrencies (I took as example the most popular as Ethereum, Litecoin..) for each month:
It is possible to have a quicker view on this seeing the annual volume trade for each crypto:
Virtual currency is often referred to as digital gold because, like the yellow metal, it is in fact a monetary asset and a store of value. Real estate, works of art, diamonds, antiques and jewels are also considered reserves of value, but they cannot be equated with currencies: they are not a fixed unit of account and do not function as exchange assets. What both gold and Bitcoin do instead.
Gold and bitcoin share the problem of scarcity. For gold it is an objective scarcity, the metal is present in small quantities on our planet and our technological capabilities do not allow us to extract it at 100%. Cryptocurrencies must be created by an algorithm, but these mining operations require a considerable expenditure of energy and enormous computing capacity that limit their extraction.
Gold and bitcoin are effective alternatives, in practice (gold) or in intention (bitcoin), to FIAT currencies. By this term, as is well known, we mean common money (such as dollars and euros), which can be - instead - created ex nihilo. The monetary printing, or the production process of common money, is operated by the Central Banks.
However, as previously said, Bitcoin and cryptocurrencies in general are highly speculative assets because they have incredible growth potential. And of volatility. It's its high leaps that draw hordes of daredevil investors to cryptocurrencies. Why reckless? Because a high growth potential always corresponds to a high risk. It is true that Bitcoins quadrupled their value over the course of 2020, but they have had equally important episodes of devaluation, which have also led to severe losses. The volatility of cryptocurrencies is immensely higher than that of stocks, bonds and physical gold.
As an example the following image shows a comparison between the volatility of Bitcoin, gold and S&P500 (considered one of the most safe index):
As the image shows the Covid-19 year (2020) has been the one with the higher volatility also for the more secure assets as gold and the S&P500 index. Anyway their volatility is much lower compared to the Bitcoin one.
Bund, abbreviation of the term Bundesanleihen, is the name used to indicate medium-long term government bonds issued by Germany.
The Bund is considered the European benchmark for government bonds. In fact, they have a substantially zero level of risk and consequently have very low returns. This is due not only to the solidity of the German economy, but also to the guarantees provided in this sense by the financial policies followed by the government authorities. During the covid-19 pandemic, German bunds had even negative rates of return. These only turned positive in early 2022, which is two years after the pandemic began.The following image shows what has been explained:
Gold is the one big safe haven asset that is always considered. For years, gold has been considered a store of value. As a physical commodity, it cannot be printed like money, and its value is not impacted by interest rate decisions made by a government. Because gold has historically maintained its value over time, it serves as a form of insurance against adverse economic events. When an adverse event occurs that lingers for a while, investors tend to pile their funds into gold, which drives up its price due to increased demand.
The following image shows the trend of gold, related to Bitcoin, Bund, S&P500 and the daily new covid cases in the world. For the gold had been used a gold ETC, where ETC stands for Exchange Traded Commodities that is traded on a stock exchange, like a stock, but tracks the price of a commodity or a commodity index. This allows investors to gain exposure to commodity markets without buying futures contracts or the physical commodity.
For dimensions reasons all datasets had been normalized , this is why they are all in the range [0,1].
As the image shows, when the pandemic started there was an increasing trend both for Bitcoin and gold. But then at the end of 2020 we can see how new covid cases and gold seems to have a similar and seasonal behaviour. Bitcoin instead doesn't seems much related to the covid-19 pandemic.
Another interest thing to notice is that at the start of 2022 the number of covid cases increased, and the gold increased too. But after some time, when the covid cases started diminish, the gold price was still going up. This was caused by the invasion of Ukraine by Russia. The war caused a blow up of gold that reached a new maximum. As previously said the economic uncertanty make the safe haven assets juicy for investors. Bitcoin instead didn't go up like gold.
Drawdown is a financial term which refers to the observed distance between the highest and lowest peak of an asset value in a considered time interval. A drawdown is therefore different from a loss, it is simply the movement from a peak to a low. Drawdown is used as a tool for measuring the risk of an investment. If we examine the historical graph of a stock, in fact, we can have a clear and immediate confirmation of the risk inherent in a possible investment in it. The following image shows a comparison of the assets's drawdown:
It's clear that Bitcoin had longer and harder time of drawdown compared to gold and S&P500. The worst percentage drawdown of Bitcoin is from 2018 to mid 2019, over an year, where it reached the peak of -67%. Gold istead is reconfirmed as the safest and least volatile asset, indeed it never overcome the -20%.
So investing in Bitcoin is the worst choice an investor can make? The following analysis doesn't suggest that.
PAC (in italian Piano di Accumulo del Capitale) is an investment solution based on periodic purchase of assets which allows to mitigate market fluctuations. In this way the capital invested by the saver, in overall terms, grows gradually over time. Indeed this approach is better for medium to long-term investors.
I started with a comparison of a PAC applied separately for Bitcoin, Gold and S&P500 for the year 2021. The PAC is done with an initial investment of 1000$ and a recurring investment of 200$ each single month.
As the image shows, only Bitcoin investment seems to be profitable. Instead both gold and S&P500 assets are under the red-dotted line that represent the total investment.
Then I repeated the analysis but with the investment starting from 2020, till the end of 2021.
In this case the Bitcoin overcome the other 2 assets, reaching an exponential growth. This behaviour is given by the fact that Bitcoin reached its peak of all the time. Also with S&P500 the investor would had a profit, instead again with gold there is a loss.
With the last analysis the investment start from 2018.
This last plot shows how the PAC is a useful investment strategy if applied in the long term. Indeed in this last case with both gold and S&P500 we would have a profit (20% and 45% of profit respectively). But Bitcoin is reconfirmed as the most profitable asset gaining a profit of 600%!
This analysis shows how the covid-19 pandemic had an impact on the world economy and there is a direct correlation between it and the safe haven assets. But as the graphs demonstrated, Bitcoin still can't be considered a safe haven asset like gold (that have low volatility but bring also low profits, as the PAC analysis showed). Instead Bitcoin is still too much unstable and it's used often with a purely speculative purpose, which accentuates its volatility. Anyway, as the last analysis showed, it had way better results in a PAC investment strategy both in the short and long term. So Bitcoin can be considered to be iserted in an investment portfolio, not like a safe asset, but still as a valuable (and volatile) option.